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3 lessons investors can learn from 2016

Photo: Donald Trump: Fair use

2016 won’t be forgotten in a hurry and maybe that’s a good thing. After all, regardless of experience, there are always lessons for investors to learn (or relearn). 

So, with less than three weeks before we bid farewell, let’s look at three things the market has should have taught us this year.

1. Expect the unexpected

Trump’s election triumph was unexpected by most. But it wasn’t just this that shocked investors. Given that markets tend to respond unfavourably to surprises, many assumed indexes would tank following his victory. However, we got the opposite — a ‘Trump bump’ — as shares in many companies, particularly those focused on defence or infrastructure, soared.

Whether Trump manages to deliver growth back to the US or not, his tenure will certainly be interesting. The whole episode also underlines that fact that no one knows for sure how markets will behave tomorrow, next week, next year or even how they will react to certain events. As Clint Eastwood once remarked: “If you want a guarantee, buy a toaster“.

2. Be diverse

For a reminder of the importance of building a diversified portfolios, look no further than June’s referendum result. Although the FTSE 100 and FTSE 250 both surged following a short, sharp sell-off, some industries, such as airlines, are still struggling to get back on track. Holding one of easyJet, IAG or Ryanair shouldn’t have done too much damage to your portfolio. However, owning all three and not much else would be have been disastrous, particularly as these companies also had to contend with air traffic control strikes and terrorist atrocities in popular destinations.

Holding a selection of companies in different markets isn’t enough. A truly balanced portfolio should have also have geographical diversification. This means buying shares in businesses with huge international exposure, such as consumer goods giant Unilever or pharmaceuticals giant Astrazeneca.

With warnings that GDP growth will fall from 2.1% to just 1.1% next year, now might be the time to check whether your portfolio is too heavily exposed to UK plc.

3. Maximum pessimism can be maximum opportunity

Our final lesson focuses on becoming comfortable doing the very things that others won’t. Let’s look at two examples from 2016.

Buying shares in big oilers such as Royal Dutch Shell in January would have been a shrewd move. Back then, shares in the £172bn cap dipped to their lowest level in 14 years (1,277p) as Brent Crude fell to $28 a barrel. Fast- forward almost 12 months and the same shares now trade almost 75% higher at over £22 each. If you’d invested £5,000 in January, you’d now be sitting on £8,750. That’s excluding any dividends you may have wisely reinvested along the way. All this before the price of black gold has even fully recovered.

Shell isn’t an anomaly. In December 2015, Glencore’s stock was trading around 90p after analysts warned it would be worthless if commodity prices remained low and the company’s huge debts weren’t addressed. Today, they change hands for 290p as miners continue to benefit from the impact wrought on currencies following 2016’s seismic political events. 

True, not every share that sinks will automatically rise in time. As always, it’s vital to thoroughly research companies and only invest if you’re convinced that the investment case remains viable. Nevertheless, 2016 has reminded us that being greedy when others are fearful can be a very profitable strategy.

2016 may have been tough but learning the identity of your greatest adversary can be even more difficult. It's not other private investors, day traders or the big institutions. Rather, it's likely to be the very person staring back at you in the mirror.

If you're keen to avoid making expensive errors in your investing career, I strongly suggest you read a special report produced by the experts at the Motley Fool. The worst mistakes investors make contains some excellent hints and tips on how you can avoid the most common blunders.

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Paul Summers owns shares in easyJet. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended AstraZeneca and Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.